Why Netflix Can Turn A Profit But Spotify Cannot (Yet)

Having just celebrated its 10^th (streaming) birthday, Netflix followed up with a strong earnings release, announcing 5.8 million net new paid subscribers in Q4, sending its share price up by 9%. This wraps up a stellar year for Netflix, one in which it doubled down on original programming and delivered acclaimed hits such as Stranger Things and The OA, shows that don’t fit the traditional TV mould. In fact, Stranger Things was turned down by 15 TV networks before finding a home at Netflix and The OA’s oscillating episode lengths (from 1 hour 11 mins to 31 mins) would have played havoc with a linear TV schedule (not even considering its mind bending plot).

Netflix closed 2016 with 89.1 million subscribers and the temptation to benchmark against Spotify’s equally strong year is too strong to resist. Spotify (which celebrated its decade in June 2016) closed the year with around 43 million subscribers, 48% the size of Netflix. But a closer look at the numbers tells another growth story.

Read the full post on the MIDiA blog by clicking here.

The Three Things Streaming Needs To Fix Next

I spent a couple of days last week in Barcelona for the annual Future Music Forum, which is developing into an important date on the music conference circuit.   Later this week I will post some of the highlights of my opening address but first I am going to spend some time developing some of the white hot issues surrounding streaming that were raised at the conference.

In a really strong field, two speakers in particular stood out: Beggars head of strategy Simon Wheeler and PledgeMusic founder Benji Rogers.   Their presentations and the conference as a whole were infused with a sense that streaming is changing everything, and more quickly than most people expected. This change is manifesting itself in three big issues:

1. Deciding what streaming’s main role is
2. What happens to the middling majority of artists
3. How to monetize the relationship between artists and fans

1. Time To Decide Whether Streaming Is Marketing Or Sales

It is clear that most labels are conflicted about streaming. They are waking up to the fact that its promise as a retail channel will take time to realize and even then it may not be a like-for-like replacement for lost album sales. Which is prompting labels to increasingly view streaming as a marketing channel too. But if streaming is both the discovery journey and the consumption destination, then what, as a label, are you trying to actually sell with streaming? Across the bigger labels in particular the digital business teams and the marketing teams need to agree on a common view on what the streaming end game is, else risk accelerating album sales decline without adequately driving streaming revenue growth.

If the question is complex for subscription services for free streaming the picture is much clearer, especially for YouTube. As Simon Wheeler said in his presentation: “YouTube is not driving sales. People are going there to consume music. The end.”  If that isn’t a case for windowing YouTube and free tiers of freemium services then I don’t know what is.

2. What Case For The Middling Majority?

Wheeler also made a vital observation that the streaming success stories tend to be split between mega hits on the one hand (such as Calvin Harris’ 1 billion Spotify streams and Avicii’s 250 million ‘Wake Me Up’ Spotify streams) and slow burn success stories on the other. He cited the example of the XX’s eponymous album that is still in the Spotify indie top 100 five years after release.

This streaming dualism makes it look like label A&R strategy may have to choose between massive hits or long-term success. And if so, what happens to the rest in the middle? You effectively end up with three key types of streaming artist (see figure):

• Evergreens
• Middling Majority
• Hit Machines

Could it be that  streaming will end up being the natural selection process for the challenge of catalogue bloat? There is simply too much music being released at the moment, creating the Tyranny of Choice, where listeners are paralysed by excessive choice. For an artist trying to break through, the background noise can be deafening and also kill any chance of making meaningful cut through. And if you do manage to do so then the endless torrent of new releases pushes you straight back to the margins.

If the streaming natural selection process plays out then unless you have created either an album that people will want to listen to again and again or instead a monster hit, then you will simply drift into oblivion. In the old model you might have sold a couple of tens of thousands of albums and managed to sustain some sort of career. 20,000 album sales would be $180,000 gross revenue but 5 million streams (roughly an equivalence in popularity) would be $50,000 gross revenue. Perhaps streaming’s Dystopian Darwinism will kill off the ability to forge a career built on mediocrity. That may be no bad thing.

3. Monetizing the Relationship

If streaming is eating into sales then the obvious next step is to drive other spending from streaming music consumers. Hence commerce integrations from the likes of TopSpin, Bandpage and PledgeMusic. Unfortunately it isn’t that straight forward as Pledge’s Benji Rogers pointed out. Rogers rightly found himself turned to at the Future Music Forum as the fan relationship guru and he made a crucially important observation: simply because some one is listening to a song does not mean they are necessarily going to want to buy anything from that artist. Instead streaming services need to think more subtly, looking at how to nurture an artist-fan relationship rather than simply trying to sell someone a t-shirt because they happen to be streaming a track.

Artists and fans are closer than ever but this journey is only getting going. And now that artists are building deeper relationships with their fans while sales revenues decline, they need to get smarter about how to monetize them.  The key question though is whether this can be enough to offset the impact of declining music sales revenue. To help answer that I created a ‘Streaming Ancillary Revenues Model’.

A new MIDiA Research consumer survey shows that 11% of streaming consumers are VERY likely to buy merchandise and tickets from their favourite artists in streaming services. I used this conversion rate against the following artist straw man for a hypothetical Year 1 versus Year 2:

• 100,000 albums sold decline to 60,000
• Streams increase from 30 million to 45 million streams
• Total recorded music revenue (streaming and sales) consequently declines by 17%
• 11% of fans buy $30 of merch, special editions or tickets each year
• Ancillary revenues grow to represent 33% of total revenues
• Revenue decline across all income streams is just 3%

So ancillary revenues can significantly soften the impact revenue decline.

(The additional factor of the longer revenue cycle for albums on streaming services should also push the total revenue up further in the longer-term but is not included in these calculations.)

There are many obvious caveats and assumptions here (not least of which is the varying margins across different revenue streams) but these are broadly the right mix of drivers and levers. You can download the model here: Music Industry Blog Streaming Ancillary Revenues Model 9 14  I invite you to play around with it and test your own theories. If you are an artist you might want to plug some of your actual numbers into Year 1 and your projections into Year 2.

Change Is Difficult But It Is Also A State Of Mind

The streaming picture is changing at an absolutely staggering rate and everyone across the value chain needs to get their heads around all the potential permutations else get left behind.

These are both exciting and daunting times. As the bland management consultancy phrase goes ‘change is difficult’. But it is. However, the way that you view and prepare for change both have as much impact on how it affects you as the change itself. Streaming is changing everything. Those who learn how to reinvent themselves for the realities of this brave new world will be those best placed to survive and perhaps even thrive.

Facebook Timeline for Artists (When Platforms Forget Their Responsibilities)

Regular readers will know I’m a big advocate of content platforms and ecosystems.  Indeed device based ecosystems such as iTunes, Kindle and xBox are the success stories of paid content. More recently these platforms have been complemented by a new wave of ecosystems by the likes of Facebook and Spotify, that depend upon software and user data for walls instead of hardware.  Both sets of ecosystems depend upon 3^rd party developer and / publisher platforms for success.  A thriving platform is one which is defined as much by 3^rd parties as it is the host company.  But just as a blossoming garden requires careful tending so does an ecosystem.  The host has a responsibility to ensure that developers and publishers have the support, processes and transparency necessary to instill the confidence necessary for them to invest their time and resources into the platform.  It is a responsibility that does not always come cheaply to the hosts and isn’t always respected to the full, as we have seen with the impact of Facebook’s Timeline on a number of artist app developers.

Artist Timelines are Throttling Artist Apps

Facebook’s Timeline feature is looking like a great innovation from the social networking behemoth and there are many examples of artists, music services and music publications using the feature to great effect.  (Take a look at Spotify’s Facebook Timeline for a super cool implementation).  However the way in which Timeline was implemented on artist pages has had a dramatic cooling effect on what was beginning to shape up to be a vibrant community of Facebook artist app developers.  Latest data from AppData.com and reported on Digital Music News shows that Band Page (formerly Root Music), Reverb Nation and FanRX (formerly BandRX) all saw a steady decline in usage in the lead in to the Timeline switchover date and then a ‘falling off a cliff’ drop on the date itself.  All three apps have remained stuck at their decimated levels.

The key reason for the collapse in user numbers is that as part of the Timeline feature Facebook prevented these apps being able to act as the landing page for artist profiles.  There is very well thought out reasoning for this move: Facebook remembers only too well the anarchic chaos of MySpace artist pages, indeed the pared-down minimalism of Facebook’s UI was an intentional antidote to MySpace messiness.  But none of this detracts from the fact that Facebook has failed to fulfil its duties as platform host.  It should have done more to accommodate the concerns of artist app developers and would be well advised to work with them now to improve their lot.  Although it would be stretching credulity to claim these apps were responsible for artists switching from MySpace to Facebook, they certainly played an important role in easing the transition for many.

Being a Platform Means Looking Out for the Small Guys Too

If Facebook is serious about becoming a platform for music, it needs to ensure that it doesn’t just lay out the red carpet for Swedish streaming services.  The value of Facebook as a music platform will come from the functionality, utility and experience delivered by 3^rd party apps that help artists differentiate the way they engage with fans.  Apps such as Band Page, Reverb Nation, Fan RX and Bopler Games.  Ensuring that strategic priorities can be implemented without destroying the livelihoods of developers is a key responsibility of platform hosts.  Of course sometimes hosts patently ignore the responsibility and use app developers as free R&D – just think about the number of times Apple has killed off app companies by integrating their functionality directly into iOS.  But even Apple knows you can only do that so many times before you risk killing the proverbial golden goose.

I continue to maintain that Facebook’s platform strategy is subtly brilliant, and in the bigger scheme of things the artist app Timeline debacle is pretty small fry.  But if Facebook is to establish itself as a genuine music platform it must learn from the lessons Band Page et al are painfully teaching.

Introducing Media Industry Blog

I’m excited to announce that today I have launched a new sister blog, Media Industry Blog.

I’ll still be posting just as frequently on here about Music Industry issues, but on Media Industry Blog I’m going to start exploring in more detail some  of the non-music specific issues I write about on here, such as Content Ecosystems, Paid Content Strategy, Media Product Innovation and Media Consumption Devices.

In my role as an analyst and consultant I’ve been fortunate to work with media companies of all shapes and sizes across all industries.  One of the key values I have gained in that time is the ability to observe at first hand the unique experiences of each industry and also the similarities and commonalities.  With Media Industry Blog I’ll continue many of the conversations I’ve had a client level and continue to help companies to harness disruption and to profit from digital content.

For the next few weeks I’ll be posting links to Media Industry Blog posts on here but will stop doing so thereafter.

Next week I’ll be publishing a report on Media Product Innovation which will be available free of charge to subscribers of Media Industry Blog.

Today I posted the first Media Industry Blog post:

Why Apple’s Impact On Media Companies Has Only Just Got Started

There was a sense of disappointment in some quarters yesterday as Apple announced the third generation iPod, largely because it looks pretty much like a better version of the iPad2 rather than a dramatic step change.  But it was the right move for Apple.  The history of Apple’s device business in the last decade and bit has been a highly effective blend of step change, and evolution.

Read the complete post here.

Amazon’s and Apple’s Mirror Opposite Content Strategies

Amazon’s announcement today of their media tablet the Kindle Fire was long anticipated.  I won’t add to the countless virtual column inches discussing whether it can be an iPad Killer (though I do agree with my former colleague Michael Gartenberg that it is competing more with the iPod Touch than it is the iPad).  Instead I think it is worth comparing and contrasting Apple’s and Amazon’s strategic reasons for being in the tablet game.

As I stated in a previous post, Amazon and Apple are 2 of Digital Music’s Triple A (Android making up the third).  Both have in their respective ways shaped online music more than any other company (Apple with iTunes, Amazon with online CD sales).  Both willplay a major role in digital music’s, at the very least, mid-term future.  But they are in digital music, and digital content more broadly, for mirror opposite reasons (see figure).

Put simply, Apple is in the business of selling content to help sell devices whereas Amazon is in the business of selling devices to help sell content.  There is a poetic symmetry the identical yet polar opposite strategies of the two companies.

The differences have direct implications that are also mirror opposites:

• Apple can happily ‘just about break even’ on music downloads because of the way it helps sales of their high margin i-devices
• Amazon can happily price the Kindle Fire so aggressively that it is priced more like an MP3 player (and expect to lose money for the near term at least) because of the volume of sales of content it expects / hopes it will drive

Perhaps most importantly music, video, games, books and all other forms of content are crucial to the success of both.  20^th century media business models may be tumbling around our ears but the fact that the future of the tablet market depends so heavily upon media products will be among the foundations for future growth.